Wealth tax notes

Prepared by
Akhil mittal
b.com(h), shri ram college of commerce
1

C H A P T E R

SECTION 3 : CHARGE OF WEALTH TAX

Wealth tax shall be charged for every assessment year

In respect of the net wealth on the corresponding valuation date

of every individual , Hindu Undivided family and company

at the rate of 1% of the amount by which net wealth exceeds

VALUATION DATE FOR PY 2010-11 / AY 2011-12:

30,00,000

31ST M ARCH 2011

SECTION 45: WEALTH TAX NOT APLLICABLE

No wealth tax to be levied on the net wealth of:

SHORT FORM TO REMEMBER: C 25 CPM

1.) Cooperative Society

2.) Company registered under section 25 of companies Act, 1956

3.) Social Clubs

4.) Any Political Party

5.) Any mutual fund specified in section 10(23D) of Income Tax Act
2

COMPUTATION OF NET WEALTH

Net wealth to be calculated as follows:

Aggregate value of all assets located in India

Or outside India belonging to the assessee on
Valuation Date as per Sch .III of wealth tax act

XXX

Aggregate value of all asset to be included in the

Net wealth of assessee (Deemed Assets u/s 4)

XXX

Exemption under section 5 of wealth Tax act

(XXX)

Debts owed by assessee on the valuation date

W hich has been incurred in relation to the assets
Included in the net wealth of the assessee

XXX

NET WEALTH

XXX

 While computing NET WEALTH, exemption under section 5 is

given before the deduction of debt(s).

 It is also to be noted that assets & debts located outside INDIA

are excluded from the net wealth as discussed in SCETION 6.

SECTION 2(ea) : DEFINITION OF ASSET

ASSET means:
Building
(A)

Land Appurtenant
Any building or land Appurtenant thereto, whether used for
-- Residential Purposes
-- Commercial Purposes [Explanation as under]

Vacant or
Rented
Building or land
Appurtenant

This is covered under

Liability of wealth Tax
Because land has to be
Used for business not
for the other purpose.

Used for
commercial production

This is not liable to wealth

tax because assets are here
productive assets i.e. used
for the business purpose.

-- For the purpose of maintaining a GUEST HOUSE

-- Otherwise.

Important Notes:

(1)

25 kms

25 kms

HOUSEincludes a FARM HOUSE situated within 25 Kms , from the local limit of
municipality. [Whether known as a municipality, municipal corporation or by any
other name) or a cantonment board.]

(2) Limit of 25kms is applicable to FARM HOUSE, but NOT ON GUEST HOUSE. As
such guest house if located anywhere will be included in computing WEALTH TAX.

(3) FARM HOUSE means BUILDING ON AGRICULTURE LAND.

Not to include:
(1) A house exclusively used for residential purpose and which is allotted by a company
to an employee/ officer/director who is in whole time employment, having a GROSS
ANNUAL SALARY of LESS THAN

5,00,000.

 If an employee gross annual salary is 5,00,000, then the house will be

included in the net wealth of the company.
 And this exception applicable only if a company gives house to its employees.

(2) Any house for residential or commercial purpose which forms part of STOCK IN
TRADE.
 Here house means any house.
 If any guest house is held as STOCK IN TRADE then guest house is not an asset.
 Example: DLF, PARVSNATH holding house as its STOCK IN TRADE.

(3) Any house which the assessee may occupy for the purpose of any business or
profession carried on by him.
 Here exemption is on condition that assessee himself must carry on the

business. If any other person is carrying on then the house will be part of
the asset & hence liable to WEALTH TAX.
 If assessee give house on rent to a tenant to carry on a business- ASSET & liable
to wealth tax
 Any House means: Residential or commercial.

Example: Doctor owns a house with ground floor & first floor.

Residential
purpose
Business
purpose

(4)

Asset
Not an asset

Any residential property which is let out for more than 300 days during the
previous year.

 If tenant does business and for more than 300 days NOT AN ASSET &

hence not liable to wealth tax.

CASE STUDY: RABINDRANATH DHAL

If a person gives a partnership firm a building to carry on a business in which he is
a partner, then it will be said that BUILDING IS BEING USED BY THE PARTNER
for the purpose of its business or profession and as such since used by partner
himself and SO NOT AN ASSET. The asset will not be included in the net wealth o
the partner since it is not an asset
(5)

(B)

Any property in the nature of commercial establishment or complexes.

Motor cars:
(1) Motor Car whether imported or Indian, constitute as ASSET.
(2) Motor car used for business or for personal use are ASSET.

Not to include:

(A)Motor Car used in business of running them on HIRE. [eg A person giving car on
hire to TAXI DRIVER having yellow number plate].

(B) Motor car is held as stock in trade.[e.g. Maruti dealer have stock of CARS].

Other Important points:

Following are not treated as motor car:

BUSES

TRUCKS

DISPLAY VAN

AMBULANCE

2 & 3 WHEELERS

TRACTORS

(C) JEWELLERY:

Jewellery, bullions, furniture, utensils or any other article made wholly or partly of GOLD,
SILVER, PLATINUM or any other precious items or any alloy containing one or more
precious metals.

Not to include:
(A) Jewellery, bullion etc held as STOCK-IN-TRADE. E.g. jeweler having stock of
jewellery. Personal jewellery of the jeweler is also an ASSET.

(D) Yachts, boats and aircrafts:

YACHTS

BOATS

AIRCRAFTS

(1)

Helicopter is an aircraft and hence is an asset.

(2)

SHIP is neither yachts, boat hence not an asset.

(3)

If yachts, boats & aircraft are held as stock in trade, then it can be said that
they are used for commercial purpose & so IT IS NOT AN ASSET.

Now we will understand the meaning of commercial purpose through an example:

Mr. A
has 2 aircrafts/yachts/boats

1st aircraft/yachts/boat

2nd aircraft/yachts/boat

(Used for transporting people

at large)

(Used for personal purpose)

In this case, people are being

transported at large. It means
airline co.

Here the person has to obtain

the personal license.

So there in need of commercial

License to be obtained from the
Government. [Strict Rules]

No strict rule is there by the

government

Rules are there so in wealth tax

Provision, no W EALTH TAX on
aircraft/yachts/boat.

It is considered as an ASSET, so
wealth tax to be levied

(E) Urban Land:

 Vacant land is also an asset.

Not to include:
(1) Land on which construction of a building is not permissible under any law for the
time being in force in the area in which such land is situated. That is if law of the area
in which land is situated prohibits constructionNOT AN ASSET.

Here important point is that law that prohibits the construction of the must of the
AREA in which the land is situated. It will be useless to say that High Court doesnt
permit any construction.

(2) Land occupied by any building which has been constructed with the approval of the
appropriate authority.

Let take an example:

Land Owne r
Mr. A

Land on lease given to

Mr. B for 30 years

Mr. B constructs building

On the land
Now practically speaking,
(a) While valuing the value of the building, the value of the land is also included.
But here the building is constructed by Mr. B. As such the value of land to
be included in the net wealth of Mr. B not in wealth of M r. A.
(b) Since the land is not included in the net wealth of Mr. A , so here it is an
exclusion that value of land not to be included in the wealth of LAND
OWNER on which building has been constructed.

10

(3) Any unused land held by the assessee for industrial purpose for a period of 2 years
from the date of acquisition.

(4) Land held as stock in trade by the assessee for a period of 10 years from the date of
acquisition.

Urban land means land situated:

(A) In any area which is within the jurisdiction of a municipality which has a

population of not less than 10,000 as per the last preceding census
published before the valuation date.

(B) In an area within such distance, not being more than 8 Kms from the

local limits of any municipality or cantonment board.

Now remembering the provision of the farm house where

the distance from the local limits is 25 kms, the two i.e.
land & farm house are different from each other.

In case of FARM HOUSE limit is 25 KMS.

In case of URBAN LAND limit is 8 KMS.

 So any farm house if situated within 8kms or 25 kms of the local limits of
the municipality IS AN ASSET.
 So if any urban land if situated within 8 kms IS AN ASSET but in case if
land is situated beyond 8 kms but within 25 kms is NOT AN ASSET.
THIS IS EXPALINED WITH THE HELP OF DIAGRAM ON NEXT
PAGE

11

Land 3 [it
it is not an asset since it falls beyond 8 kms of local limits]

17
kms

MUNICPALITY
P OPULATION
> > 10,000

Land 2

Land 1

These 2 lands are

Asset since they
Are in municipality
And within 8 kms of
The limits

8km

Farm house 1

Farm house 2

Farm house 3

ALL THE FARM HOUSES ARE ASSET BECAUSE

THESE ARE WITHIN THE MUNICPALITY OR
WITHIN 25 KMS OF THE LIMITS OF MUNICPALITY

(F) CASH IN HAND:

In case of INDIVIDUAL & HUF: In excess of

In case of OTHER PERSON
[Companies/Firm/ AOP/ BOI]

50,000 is ASSET

: Amount not recorded in the books of accounts

is asset.

12

Section 4 : deemed assets

The value of the asset should be added in the net wealth of the individual belonged
to the assessee but held by the following as on VALUATION DATE:
(a) Asset held by his/her spouse to whom such asset have been transferred directly or
indirectly without any consideration or otherwise in connection to live apart.
(b) Asset held by his/her minor child not being a minor married daughter. [This is
because after marriage normally all the property of the daughter and its control go
in the hands of her in-laws.]. The asset held by minor married daughter will be
clubbed in her own wealth.

If a minor is suffering from disability u/s 80u of the income tax

act, then no clubbing of the wealth of the minor in the wealth
of his/her parents. [It is done so that the disabled minor is not
dependent on others].

(c)

Where any asset has been transferred to an association of person by an individual

directly or indirectly for inadequate consideration for the immediate or deferred
benefit of the individual or his/her spouse.

13

(d) Any person to whom asset has been transferred other than under an
irrevocable transfer. [That is if asset is transferred under revocable transfer
then the asset value will be clubbed in the hands of transferor].
Meaning of irrevocable transfer:
It includes transfer of the asset, by the terms of the instruments:
 It is not revocable for a period exceeding 6 years OR
 It is not revocable during the LIFETIME of the assessee.
 Under this transferor derives no direct or indirect benefit.

(e) Any asset transferred to sons wife by him/ her directly or indirectly otherwise
than for adequate consideration [i.e. inadequate consideration].

(f) Where any asset has been transferred to an association of person by an individual
directly or indirectly for inadequate consideration for the immediate or deferred
benefit of his/her sons wife.
SOME OTHER POINTS TO BE CONSIDERED:
(1) Child includes STEP CHILD AND ADOPTED CHILD.
(2) Asset acquired by the minor not to be clubbed in following cases

(I)
Income earned on account of manual work done by minor.
(II) Income earned on account of activity involving application of his
skills, knowledge and experience.

14

SECTION 4(1)(b): interest of partner in a firm or member of

aop

Where the assessee is a partner in a firm or a member of AOP [other than

cooperative society]:
The value of assessees interest in the
Asset of the firm or AOP determined as
Per Schedule III

to be included in
THE NET WEALTH
of the assessee.

Section 4(5A) : gift by book entries

Where a gift of money is made

By 1 person to other by way
Of merely BOOK ENTRIES

and money has not been

actually delivered to the
the other person

Then SUCH GIFT shall

Be liable to be included
In the NET WEALTH of
person making the gift

Section 4(6) : holder of impartiable estate

The holder of a INPARTIABLE ESTATE shall be deemed to be the owner of all the
properties comprised in the estate.

15

Section 4(7) : member of a cooperative housing society

Where the assessee is a member of

Co-operative
Society

company

association of person

And building or land or part thereof - - - - - > is allotted under a housing scheme of
the society, company or association

Then the assessee will be deemed to be THE

OWNER OF SUCH BUILDING & shall be
Included in the net wealth of the assessee

Section 4(8) : deemed ownership on possession

A person who is allowed to take possession of any building in part performance of

a contract referred to in section 53A of the TRANSFER OF PROPERTY ACT
shall be deemed as the owner of such building and the value of such building
shall be included in THE NET WEALTH OF SUCH PERSON.

16

SECTION 5 : exemption in respect of certain assets

Following assets should not be included in the wealth of the assessee:

(1)

Any property held under trust for public purpose of a

CHARITABLE or RELIGIOUS nature in India [Section 5(i)]

IMPORTANT points to remember :

(1)

Exemption is allowed for those assets only which is used for

religious or charitable purpose.

BUSINESS
ASSETS

Exemption under this section:

If the business is incidental to the
attainment of the objective of trust &
Separate books are maintained
No Exemption under this section:
If not incidental to the objectives of
The trust

If the public purpose of charitable or religious nature is outside INDIA,

then the property held under trust, wherever located, SHALLL NOT BE

EXEMPT.

17

(2)

The interest of the assessee in the co-parcenary property of an HINDU

UNDIVIDED FAMILY of which he is a member. [Section 5(ii)]

(3)

Any one building in occupation of a RULER, being a building which was

declared as

his OFFICIAL RESIDENCE by the central government.

[Section 5(iii)]

REASON FOR INSERTING THIS EXEMPTION:

At the time of independence the government of India decided to merge all the
states of the kings/ rulers. But they all opposed to it. So government provided
them certain benefits:







Titles will be kept the rulers with them even after merger.
Palaces will be given to the rulers
1 palaces - -> To be regarded as official residence
Central government will bear all the expenses of such official residence.
Such official residence will be exempt from the wealth tax.

CASE STUDY: MOHAMMAD ALI KHAN [SUPREME COURT]

Where a ruler owned a palace which

was

declared by the CENTRAL

GOVERNEMENT as his official residence & this palace consisted of various

buildings out of which some buildings were LET OUT to various tenants, then

exemption under 5(iii) will be allowed only in respect of those buildings which
were occupied by the ruler for residence not for the rented building.

18

Assume that these

are rented, as such
these buildings are not
exempted under
5(iii)

A PALACE

--> Assuming this building

is used by ruler
for his own residence
& exemption under
5(iii) is available

If a person takes exemption of a palace under section 5(iii) then he will not be
allowed to claim exemption for another house under section 5(vi).

(4) Jewellery in the possession of the any ruler, not being his personal property,
recognized as heirloom jewellery by the CENTRAL GOVERNEMENT subject to
the following conditions:
(I) The jewellery must be kept in India & not to be removed outside India
without prior approval of CBDT.
(II) Reasonable steps should be taken to keep jewellery in original shape.
(III) Facilities should be provided to any officer of the government authorized
by the CBDT in this behalf to examine jewellery.

19

( 5)

In case an assessee being a person of Indian origin or a citizen of India

Who was ordinarily residing in a foreign country

And who is leaving such country, has
Returned to India with intention of permanent
Residing thereon &

Money send to India

---------------1 year -------------------

Suppose assessee comes

to India on 03-06-2011

Any foreign Country

(04-06-2010)

Asset acquired by him out of

Money within 1year
Immediately preceding the
date of his return

Value of any asset or money brought by

him in India

SHALL BE EXEMPT FOR A PERIOD OF 7 SUCEESSIVE YEARS COMMENCING

WITH THE ASSESSMENT YEAR NEXT FOLLOWING THE DATE ON WHICH
SUCH PERSON RETURNED TO INDIA

For example: If an assessee returned to India on 01-01-2011, then exemption will be of 7

successive years commencing from AY 2011-12 to AY 2017-18.

20

Some other important points to re member:

(1)

Money standing to credit of NRE (non resident external) account

on the date of return should be deemed to be money brought by
him into India on that date. (In NRE account assessee can deposit
only foreign currency only).

(2)
If an asset is brought from USA & it is converted in money IN INDIA

And used money in buying

other asset, then this asset is also
eligible for the exemption

(6) Exemption under section 5(vi) is allowed in case of INDIVIDUAL or HUF in

respect of:
(A)One house or part of house OR
(B) Plot of land of 500 sq. meter or less
1. Exemption is available for a house whether residential or commercial or let out or
self occupied.
2. Exemption unde r section 5(vi) can be availed for a guest house or farm house.
3. Exemption unde r section 5(vi) can be claimed for house / plot in foreign country
also.

21

Section 2 (m) : debts

Debts owed by the assessee on the valuation date are deductible. If these debts are
incurred on the assets included in the net wealth. Interest accrued on such loan as on
valuation date is al so part of debt owed.

Section 6 : exclusion of assets and debts outside

india

In following cases if an asset located outside India and debts incurred in respect of
that asset [debts may be outside India or in India] shall NOT be INCLUDED in
the net wealth of:

Individual
- - Not a citizen of India
- - Non- resident
- - resident but not ordinarily

huf

company

- - Non- resident
- - Resident but not ordinarily

-- Non- resident

resident

resident

22

In following cases if an asset located outside India and debts incurred in respect of
that asset shall be INCLUDED in the net wealth of:

Individual
- - Citizen of India
- - Resident
- - Resident & ordinarily

huf
- - Resident
- - Resident & ordinarily

company
-- Resident

resident

resident

23